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The Global Impact of Counterfeit Electronic Components

August 18, 2015

Electronics are an indispensable part of our lives today. Whether you’re flying an airplane or driving a car, talking on your phone or using your computer, a majority of our life is enabled by electronic components. Unfortunately, electronic components in consumer electronics, cars, military and commercial planes are increasingly being counterfeited. Fake components lead to product failures and can even cause personal injury and death.

The Serious Problem With Counterfeit Components

In 2012, a Senate Armed Services Committee uncovered more than 1 million “bogus parts” in the Pentagon supply chain. The suspected components were found in mission computers for important missiles, military aircrafts and helicopters. The violations were traced to China for more than 70 percent of the occurrences.

However, the problem is not limited to the defense industry only. Industryweek reported “consumer and industrial businesses are losing approximately $250 billion each year because of counterfeit components.” The automotive industry is also losing $3 billion in sales, and the semiconductor business is taking a $75 billion hit due to counterfeit parts.

Additionally, counterfeit electronic components have created meaningless danger for military and everyday consumers alike. As a result, even legit electronics manufacturers across a wide range of industries now face high levels of scrutiny and exposure to additional risk and liability.

What Are Counterfeit Electronic Components?

Counterfeit electric components are items manufactured or distributed in violation of trademark laws, intellectual property laws and international property rights. Origin, performance or stated characteristics of these components are misrepresented by the manufacturer or the reseller of these parts.

Counterfeiting is lucrative when scrapped electronic components, parts from recycled electronic products, or inexpensive components can be re-labeled and sold as new, higher quality and more expensive versions. Due to this high profitability and low risk of being caught — especially in the developing markets — counterfeiting activity has proliferated in recent years. Additionally, disposal of electronic waste by the western world in poorer countries has made the problem worse.

Origin of Counterfeit Components

Most counterfeit markets are located in the developing countries of Asia. China is the undisputed leader for counterfeiting electronics followed by its neighbors in Taiwan, Philippines, Indonesia, Malaysia, India, Russia, Vietnam and South Korea.

Imposters have gamed the supply chain in multiple different ways, as they find the best parts to counterfeit and introduce back into the electronic parts supply systems. Let’s take a look at the most common channels that produce counterfeit electronic components:

Used consumer electronics products — Technology is rapidly changing every day, and consumers are discarding their electronic devices more frequently than ever. Developed countries that have stringent environmental laws domestically end up shipping used consumer products to Asian countries. Counterfeiters access this large pool of discarded electronic components to rip them apart and re-introduce them back into the supply chain.

Electronic scrap improperly discarded by manufacturers — Manufacturers or middlemen in the supply chain routinely discard products that don’t meet specs or fail inspection tests. Working under cost pressures, these companies don’t make the extra effort required to completely destroy the defective parts. Counterfeiters have established “organized” businesses to get ahold of these components. Stories have also been reported where swindlers have indulged in dumpster-diving at manufacturers’ waste sites.

Counterfeits produced by legal manufacturers — Yes, the same manufacturers producing quality components under legal contracts with legitimate companies could also be producing counterfeit components. They may sometimes run off-the-books production shifts to produce inferior quality components that don’t undergo the same level of testing and inspection. These parts are sold at a large discount to the underground channels and pose a risk to the reliability of future electronic systems.

Inside jobs by dishonest employees — In many instances, employees at a manufacturer or distributor may steal products from their operations and resell them to the market at dirt-cheap rates.

Counterfeiting operators range from mom and pop business owners to organized criminal gangs working in an industrial setting. Electronic components are often sanded to remove original brands. New labels are then re-applied to make them look like genuine parts. In many cases, black paint is applied on top of labeling and re-branding is done — the practice of applying black paint is called blacktopping.

How Manufacturers and Distributors Can Avoid Counterfeit Issues

While there are various channels that produce counterfeit electronic components, there are several preemptive steps that companies can take to reduce the risk of your parts being counterfeited. You can also find ways to prevent the counterfeits from entering your material supply.

If you’re a manufacturer, consider gamma marking or new tagging methods which are hard to copy. If you find counterfeiters selling fake parts with your brand name, work with U.S. Customs to sanction those shipments. Instead of engaging with middle-men who offer lower costs without guarantees to part authenticity, purchase directly from original component manufacturers (OCMs) or authorized distributors.

For mission-critical parts, you should also think twice before outsourcing your manufacturing overseas. Find out if the cost-savings are worth the extra risks. If outsourcing makes sense, create disciplined inspection and testing processes before you ship the product to your customers.

Investing in Reliable Inspection Processes

Since the counterfeiting problem is huge and growing, there are plenty of new and creative ways to combat it. Consider transforming your inspection and testing processes to incorporate the best and the most advanced practices. Investment in strong inspection processes will help you avoid counterfeit parts downstream of your supply chain, and avoid costly recalls or liability costs in the future.

Incoming product inspection is a must to ensure no counterfeits enter your company’s supply chain. Counterfeit electronic components are generally refurbished and re-labeled before being resold as a new product. Various screening methods can help detect marks made from various counterfeiting methods like sanding and re-labeling, blacktopping and more. Traditional detection and inspection methods include:

Visual inspection —This is the most simple inspection method, and it can be done quickly. With the use of an optical microscope and chemicals, an expert inspector can detect sanding marks, blacktopping activity, proof of rework, forged markings, or logos and modification of original characteristics on a part.

X-ray inspection — This can be effectively used to detect if parts are counterfeit. Just as x-rays allow you to examine fractured bones, x-rays of a component provide an image of its internal structure. X-ray inspection is more effective when parts being inspected can be compared to an authentic part. Employ X-ray fluorescence spectroscopy to check the status of RoHS which is often overlooked by the fraudulent parts-makers. RoHS is the Restriction of Hazardous Substances Directive which restricts the use of six hazardous materials in the production process of electronics. These are lead, mercury, cadmium, chromium and two types of bromine compounds.

Decapsulation methods — These are used to verify a manufacturer’s etching on wafer or a part. Decapsulation can be done mechanically via cutting and cracking or chemically via acid by removing the lid or top layers of the component body to expose the internal structures of the part.

Scanning Electron Microscopy (SEM) or X-Ray Fluorescence (XRF) — This can help examine the microscopic internal structures of parts. Like X-Ray, SEM and XRF are effective when a genuine part is used for comparison. If you want to look for elemental constituents in a part, you can also use Energy Dispersive X-ray Spectroscopy (EDS).

Advanced Detection Techniques

While traditional inspection methods may help you combat the issue, counterfeiters are getting highly sophisticated over time. “You wouldn’t believe the difference in the counterfeit microcircuits (now compared to) five or six years ago,” Defense Logistics Agency expert Christine Metz mentioned on Breaking Defense in a late 2014 article. Metz added that, in the past, counterfeiters often used to misspell the original company’s name on the label, or make fake markings that would come off using a nail-polish remover. However, they have advanced their counterfeiting techniques now.

Along with better counterfeiting, the counterfeiters have become better at understanding how traditional detection methods work. They are becoming more sophisticated in reproducing and relabeling parts. As a result, advanced detection methods are becoming necessary. Many of the conventional tests are now done with better tools or advanced techniques. For example, SEM is now being commonly used to find the delicate differences of blacktopping. EDS is also being used to detect differences in elemental constituents between the actual part body and blacktopping material.

More new methods like Fourier Transform Infrared Spectroscopy (FTIR), Ion Chromatography (IC), Scanning Acoustic Microscopy (SAM), and Thermal Analysis are also being used.

If you don’t have the people, processes, tools and knowledge about best-in-class inspection processes, engage with industry groups or reputable technical services companies. Some of these companies can not only perform inspections for you, but they can also help develop processes and systems to identify and prevent the fraudulent product in your supply chain. NTS partners with clients to develop quality systems that will help keep counterfeit components out of their material supply.

How to Keep Counterfeit Parts Out of Your Supply Chain

Whether you’re a manufacturer or distributor, make sure you have a system in place to control your product flows. Maintain strong records of physical scrap destruction, overages, surpluses and discarded products. Make sure you have a holistic view of your supply chain environment and attack the problem of counterfeit parts in a systemic way.

The U.S. government and the electronics industry community have taken measures to fight the counterfeiting problem. It’s important to understand these rules and regulations and adopt the best practices shared by these groups. By adopting industry-recognized standards, you can reduce the risk of counterfeits entering your supply chain. For example, in the aerospace industry, you can:

Adopt SAE’s Aerospace Standards — SAE International is a “global association of more than 138,000 engineers and related technical experts in the aerospace, automotive and commercial-vehicle industries.” Originally created to serve the automobile industry, SAE stands for Society of Automobile Engineers. Over the last 100+ years, it has transformed into an authority on creating voluntary consensus standards for the aerospace and automotive industries. Several of SAE’s Aerospace Standards can help suppliers and distributors in the aerospace and the broader electronics industry with building processes to keep counterfeit parts away from their supply chain. Some of these standards include:

Aerospace Standard (AS) 5553 — If you purchase electric parts for integration into aerospace equipment or assemblies, you should implement the AS 5553 standard. This standard was created to tackle the substantial increase of counterfeit electronic components entering the aerospace supply chain posing significant reliability and safety risks.Adopted by NASA and the Department of Defense, this standard outlines processes for supplier management, procurement, component verification, electronics component design, materials management, and strategies on how to respond when nonconforming parts are found. The AS 5553 standard is designed to be flexible. The extent to which the standard should be applied depends on the desired reliability and performance of the aerospace application.Besides compliance, there are real benefits to implementing AS 5553. If you’re a manufacturer, your processes will now be better designed to deliver products that meet or exceed your customer’s specifications. You may see reduced operating costs due to continuous improvement in manufacturing processes, as well as better yields and higher efficiency. You’ll also improve your company’s image with internal and external stakeholders, and elevate the focus on traceability of components to help prevent issues. Increasingly, procurement specs will entail AS 5553 certification as a requirement — being ready now will help you pursue more business opportunities in the future.

Aerospace Standard (AS) 6081 — AS 6081 is specifically intended for distributors to help keep counterfeit electronic components out of the supply chain. This standard was created to provide consistent requirements, practices and processes to alleviate the risks of purchasing and supplying counterfeit components. The AS 6081 standard helps standardize processes related to identifying reliable sources for procuring parts. It also helps analyze and reduce the risk of distributing counterfeit parts. The standard also shows how to report fraudulent or potentially fraudulent parts to other potential users.

Invest in Supplier Development and Start Tackling Issues Now

An effective way to keep counterfeit parts from your supply ecosystem is by investing in supplier development. By collaborating with your suppliers, you can help them recognize counterfeit or nonconforming parts, and avoid these issues before those parts enter your production process. Share your knowledge and experience with SAE standards, and help your suppliers become compliant as well. You can also help them employ Lean Manufacturing, Six Sigma, and other process improvement methods to improve efficiency, product quality and reduce costs.

As counterfeiters are getting more sophisticated with forging components, manufacturers and distributors will have to stay a step ahead by adopting advanced detection techniques and continuously improving their inspection and quality control processes. If you have a role in supplying parts to the electronics industry, embrace the SAE and other recognized standards, and stay up-to-date on changes. Becoming SAE standards-certified is becoming a pre-requisite when working with major customers. Certifying your system to a standard not only helps you significantly reduce counterfeit risks, but will be a competitive advantage for your organization.

Call NTS: We’re the Experts

NTS is one of the largest and oldest commercial test laboratory networks in the United States. We have a solid and proven understanding of conventional and advanced inspection and test processes to detect counterfeits. However, our focus isn’t solely detection — we also partner with manufacturers and distributors to keep counterfeits away from their supply chain.

At NTS, our test, inspection, process improvement, supplier development and certification services meet a lengthy list of international standards across various industries. Every quote we give is absolutely free. When you have a suspected counterfeit component to test or inspect, contact us for one-time testing as well as for deploying proper testing tools and processes in your operations.

If you have questions about counterfeit component detection techniques, or SAE and IDE standards to prevent counterfeits from entering your supply ecosystem, contact our expert team today. We have relationships with community and government agencies in the United States and internationally, so we can help you implement the best practices for your company.